The mortgage market, which experienced unprecedented double-digit growth for much of the last decade, is poised for flat and potentially negative growth over the next year or so. Mortgage professionals, especially those new to the business or those facing shrinking prospects, often equate customer value simply to interest rates. A great many of those individuals will find themselves in the middle to bottom of the sales pack with lower funding ratios because they have not demonstrated or offered value in the eyes of a customer.
Of course, customers want to get the best rate - they think it is the best deal. In many respects that assertion is a sign of control, on the one hand, and a signal for help on the other. Rate is the one constant mortgage providers have enabled customers to compare at the click of a button. It is the one absolute where customers feel as though they can ask and be knowledgeable in its meaning.
In fact, in the most recent CAAMP-Maritz Fall Survey, 83 per cent of consumers indicated rate was the most important mortgage attribute. This may also be a signal that consumers are not aware of the other great many features or the current differences between fixed- and variablerate mortgages that ought to be important to them in considering their mortgage adviser.
More than just rates
The question of rate has become even more muddied in recent months, whereas rate comparison was fairly simple in years past. When comparing a fixed- to a variable-rate product we should speak in terms of spread and discount.
While the Bank of Canada prime rate is at a historical low of 0.25 per cent, the premium to it charged by the banks is no longer certain. In addition, discounts from prime that were fairly constant of prime minus-60 to minus-90 are now represented by large premiums to prime of plus 25 to 80 basis points. Are mortgage customers really concerned with rate? Or is it with paying the least amount of interest over the expected (and required) life of their mortgage?
In addition, many customers are also concerned with the future flexibility that will be needed in a great many instances but that cannot always be valued in monetary terms until the future need is actually determined. For instance, the ability for a customer to port a mortgage from one property to another in an increasing rate environment could be worth thousands of dollars in penalty savings and lower interest alone.
When you purchase a car are you concerned with the purchase price to drive it off the lot or the estimated cost to own and service your car over the expected life of that vehicle?
If you had the opportunity to purchase one of two seemingly identical cars made by two different companies for the same price I would assume that you would look for a reason to choose one over the other. Perhaps you do a little research and discover that car A has annual service estimates of $1,500 per year after year three, while car B includes an extended warranty and will not incur any additional expenses until year six. All of a sudden "identical" car B now has a value approximately $3,000 more than car A (ignoring future time value of money).
Wordreference.com lists a definition of 'value' as "the amount (of money or goods or services) that is considered to be a fair equivalent for something else." Nowhere in the definition does it equate value as being the absolute lowest price. Value in a real estate transaction is determined only after both the purchaser and vendor have agreed on a purchase price, not the price the property was listed at. Using the real estate analogy we can again look at a scenario where a lower sale price may have represented greater value to a vendor.
Consider multiple offers (remembering the good old days) on a listed property at $350,000. Offer A was for $340,000 with $10,000 down, no financing clause and a 30-day close. Offer B was for $343,000 with $5,000 down, conditional on home inspection and a 75-day close. As the vendor is moving cities and anxious to close with as few potential headaches as possible, it is understandable why they would choose offer A for $3,000 less.
The reality is that homebuyers who ask mortgage professionals 'what is your best rate?' are not going to be well served by a mortgage professional that simply responds with a number. In this period of economic illness it is vital that a mortgage professional offers expert advice and counsel.
Offering full service
The only way to truly offer the best advice and counsel is to ask questions to understand the clients' needs, such as: What is your ability to withstand payment shock? What are your plans for the next five, 10, 20 years? How long do you plan to stay in this house? Do you believe that low interest rates are an unexpected opportunity to pay down debt more aggressively or to have access to 'cheap' funds for investments?
The advantage that mortgage professionals have today is that they are the real experts in their field. They are not generalists and they can not think of the next customer in the door as a single transaction. They are the ones most equipped to provide expert advice and counsel that looks at a clients' overall situation and to then select a lender and a product that meet those unique needs. It's pivotal, then, that mortgage professionals ensure that their clients know they are dealing with an expert.
One way to do this is to stay in touch with your clients throughout the application process. Let them know where their application is in the process (consideration, approval, conditions outstanding, application complete). This demonstrates you are constantly looking out for their best interests.
It's also important to be the first to provide context for what they are or will be reading already in the news. For example, during the Bank of Canada rate cut, it would have been wise to contact all of your clients that had live and pre-approval applications with you and give them the information and the context related to their circumstances. Some clients will wonder if this impacts their fixed mortgage rate commitment. For others with an ARM commitment you could reassure them how great a product it is as their cost of borrowing has just gone down.
Another thing you can offer as an expert is a calculation of the current weighted average cost (reflected in interest rate) of all of your client's current debts outstanding and compare that to the consolidated mortgage interest rate they will be paying once their mortgage closes.
Also, finding out what your client's tolerances for payment shocks are can go a long way, especially if he or she is going with an ARM. Then recommend setting his or her rate at either the three- or four-year fixed interest rate (either through a Hold-the- Payment feature or by taking advantage of additional prepayment options) to protect the client in the event that rates spike and he or she is unable to convert to a low rate fixed mortgage in time.
What all this comes down to is not being just a salesperson, but the clients' advocate. Do not sell them a cookie-cutter solution - offer them a mortgage tailored to their unique needs and circumstances, then provide ongoing service to them in the same manner.
Mortgage professionals have the ability to lay out all of the various options and advise customers on the best overall package that will create the value the customer requires. With that expertise comes the responsibility for laying out the total value package for the customer. That package will surely consist of the rates (monthly payments and interest paid over the term selected) but should also identify the appropriate product based on the risk tolerance of the borrower, identify potential pitfalls in escalating interest rates at time of renewal or during the term of the mortgage, as well as convenience and accessibility.
Traditional banks use a "full-service" differentiator to encourage customer loyalty and have them think about their bigger financial picture. Likewise, mortgage professionals should make available "full-service" offers. The added benefit that brokers have is that they are the experts, and customers should be seeking out experts in times of perceived crisis and uncertainty.
Mark Kerzner (mark@kerzner.to) of Kerzner Consulting (Kerznerconsulting.com) is a strategic consultant focusing on business growth, development and market-seizing opportunities. He is an expert in all aspects of mortgage financing, and was formerly VP sales and marketing at FirstLine Mortgages, and more recently, EVP, corporate development, then EVP, operations, at Paradigm Quest Inc.